Commentary for the week ending 3-26-10

The markets continued their run this week, reaching new highs for the year. The major indices trended modestly higher for most of the week but sold off late Thursday and into Friday. For the week, the Dow closed up 1.01%, the S&P 500 gained 0.58%, and the Nasdaq rose 0.87%.

Source: MSN Moneycentral

Even though the stock market reached new highs last seen in late 2008, the interesting story of the week came from the bond market. Several issues in the news are forcing yields higher on bonds. Bond investors are very concerned at the amount of debt on the U.S. government’s balance sheet, and the news this week only increased these concerns. First, we found out that companies like Berkshire Hathaway (Warren Buffett’s company) can borrow at a lower rate than the U.S. government. That implies that there is less chance of default for these companies than for the U.S. government, a rare feat.

Next, it was reported that we will be paying out more in Social Security this year than collected in taxes. It was believed that we would reach this milestone in 2016, so this troubling statistic adds fuel to the fire for the deficit reduction hawks.

Finally, dominating the news this week was the healthcare bill. With its passing, new concerns have arisen on its cost. Despite the CBO report indicating a reduction in the deficit, further examination of the details actually reveals a substantial increase in debt.

These growing entitlements and the lack of fiscal restraint came to a head this week in the latest debt auctions. Fewer people (or foreign governments) are showing interest in purchasing more U.S. debt, so yields are rising. That impacted the entire bond market as the prices of bonds dropped (price and yield are inversely related, so when the yields rise, the price of the bond falls). So if, for example, you own a bond mutual fund or ETF, you saw a drop in the value of the fund this week. But with interest rates rising, the payments you receive from the bond fund will increase over time.

While bonds can be boring, it is important to note the trends in this market. Let’s get back to some stocks now. With the healthcare bill now requiring all Americans to purchase insurance, this is seen as a boon to healthcare stocks. This sector has had a nice run recently due to this fact. Digging deeper into the healthcare bill, though, reveals some very damaging items for this sector. A little reported new law will require insurers to pay out 85% of each dollar collected to claims, while the remaining 15% goes to administrative and other miscellaneous expenses. That doesn’t look bad on the surface. The problem is, that ratio currently stands at 65/35. So for every dollar you pay now, 65 cents pays for claims and 35 cents covers those admin costs.

Do you see the problem there?

Insurers must cut their administrative costs by more than half (from the current 35% to the new 15%). In order for insurers to meet the new 85/15 threshold, they will either have to dramatically cut admin costs (i.e.-fire people) or dramatically raise premiums - which won’t be allowed. If this daunting new 85/15 threshold can’t be met, the insurer will be out of business.

Also in the bill is a new 40% tax on “Cadillac” health packages beginning in 2018. This tax will not be paid by the person receiving the benefits, though. For some reason it will be paid by the insurer. Margins will have already been squeezed from the 85/15 mandate, and this new cost may be the final nail in the coffin for private health insurers.

While the bill may look like a boon to the healthcare sector, it is actually just the opposite. The government opted to not include the public option in the bill, but these new mandates provide them with the back-door takeover they desired. We believe healthcare stocks should be avoided at all costs, and more adventurous investors might profit by shorting (profit when the value falls) these stocks.

Next week marks the end of the first quarter and will have several economic reports we will be watching. Personal income, consumer confidence, factory orders, and manufacturing reports will all be released. The most important report will come on Friday (although the stock market will be closed for Good Friday) with the release of the unemployment rate. We have seen estimates as low as 20,000 job gains and as high as 300,000. The market is pricing in a pretty large gain here, so a poor number will likely cause a sell-off (on the following Monday).

Where are we investing now?

For the overall market, we remain optimistic in the short term, but cautious. As we have said in past reports, the easy money and stimulative measures currently in place will help the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and high unemployment have us worried for the longer term.

In equities, we are focusing on higher-quality and multi-national stocks. We are still bullish (optimistic) on commodities and believe that government policies will weaken the dollar in the long term. TIPs continue to be a favorite, as we expect inflation to increase in the future, despite being tame at the moment. U.S. treasuries are a sector we are very bearish (pessimistic) on. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.

Commentary for the week ending 3-19-10

The market continued to prove the pessimists wrong as it hit new levels last seen in September 2008. The major indices trended modestly higher for most of the week but sold off of Friday. In the end, the Dow closed up 1.10%, the S&P 500 gained 0.86%, and the Nasdaq rose 0.29%.

Source: MSN Moneycentral

We received mostly good economic reports this week indicating that the economy is still in growth mode. Industrial production continues to rise, leading economic indicators are still positive, and the Philly Fed index was positive. Two reports issued this week, the Consumer Price Index (CPI) and Producer Price Index (PPI), showed little signs of inflation. A negative report showed housing starts fell by nearly 6% in February, which means homebuilders are building less homes and apartment/condo buildings. We don’t necessarily see this as a bad thing and hopefully the housing market can find some equilibrium soon.

Of course, the big news of the week came out of Washington with the announcement of an upcoming vote on the healthcare bill. At the time of this writing, no agreement has been reached, however, it looks like it will pass. We won’t waste any time discussing the constitutionally of this bill, its illegal backroom deals, fraudulent accounting sent to the CBO, the questionable passage methods of reconciliation and deem-and-pass, or the fact that there is not even a bill that can be read before it can be voted on.

Instead we will focus on its impact to your investment portfolio. We are already seeing companies like Caterpillar claim costs of $100 million in the first year alone. Obviously these costs will impact their bottom line, making their stock less attractive. If this is indicative of the new costs businesses will face, we could be in for a long period of subdued returns in the stock market and in your portfolio.

Besides the costs to businesses, a multitude of taxes on individuals will be raised to pay for this bill. We are already worried about the expiration of the Bush tax cuts, and the new taxes layered on top have us very concerned. Under these conditions, though, municipal bonds become more appealing. These bonds are exempt from federal tax, and the income received from them does not count to overall income. That could prevent an investor’s income from putting them in a higher tax bracket. For smaller portfolios, muni bond mutual funds or ETF’s can provide a nice diversification, while larger portfolios can consider individual muni bonds. Muni bonds are already a popular investment choice for high net worth investors, but their appeal may become more widespread in the coming years.

Most of the focus next week will likely be on the healthcare bill, but there are a few economic reports we will be watching. Home sales and durable goods reports come in Tuesday and Wednesday, and Friday we get the final revision of the fourth quarter GDP number. Little change is expected in these reports, but as always, we will be keeping our eye out for and surprises.

Where are we investing now?

With the passage of the healthcare bill, we may get a jump in the stock market. The market hates uncertainty, and the passage of the bill, no matter how bad it is, will end the uncertainty. Healthcare sector stocks may get a boost as well, for the same reason. These stocks have had a nice run recently, but we are reluctant to venture into this sector since there is too much government involvement for our comfort. As we have seen in the past year, the government likes to change the rules of the road when it deems necessary, and it usually comes at the expense of the investor.

For the overall market, we remain optimistic in the short term, but cautious. As we have said in past reports, the easy money and stimulative measures currently in place will help the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and high unemployment have us worried for the longer term.

There is no change in our investment strategy this week. In fact, last week we made zero transactions. No purchases and no sales, just riding this rally. We would like to put some money to work on a pullback, but a good opportunity has not presented itself. Anyway, in equities we are focusing on higher-quality and multi-national stocks. We are still bullish (optimistic) on commodities and believe that government policies will weaken the dollar in the long term. TIPs continue to be a favorite, as we expect inflation to increase in the future, despite being tame at the moment. U.S. treasuries are a sector we are very bearish (pessimistic) on. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.

Commentary for the week ending 3-12-10

It was a fairly quiet week on Wall Street with little movement among the major averages. For the week, the Dow gained 0.55%, the S&P 500 gained 0.99%, and the Nasdaq had a nice showing with a gain of 1.78%.

Source: MSN Moneycentral

With light volume and low volatility on the stock exchanges, the market hit a new 17-month high this week. It looks like the economic recovery is continuing, albeit at a slow pace. We received some encouraging reports that helped move the market: the trade deficit narrowed and retail sales rose by 0.3% last month. These retail sales figures caught many by surprise, since the snowy conditions had many economists predicting a decline in sales. Still, this is welcomed news.

With the good comes the bad, though. Shortly after the retail sales were released on Friday, the University of Michigan consumer sentiment index showed a drop from the previous month, dampening the enthusiasm among investors. This report means that fewer people are optimistic about the economy. It’s not hard to see why, when unemployment remains high and the future is cloudy, and energy prices keep rising.

While on the subject of energy, this week Goldman Sachs revised their forecast for oil prices to a range of $85-$95 per barrel (it is currently trading just over $80). For the past several months, oil has been trading in a range of $70-$80, so a price over $90 per barrel will likely send gas over $3 per gallon. Obviously this will put a damper economic growth. While these forecasts are often wrong (Goldman once predicted $200 per barrel- it only reached $150 at its peak), it is still a discouraging scenario that must be considered.

There are several items we will be keeping our eyes on next week. For economic reports, we will get industrial production, housing starts, producer price index (PPI), and consumer price index (CPI). The most important event we will be watching comes on Tuesday, as the Fed holds its monthly meeting. While we don’t expect any change in interest rates, traders are focused on any indications of when they may begin to raise rates. We could be in for a more volatile week next week.

Where are we investing now?

In the short term we remain optimistic, but cautious. As we have said in past reports, we believe the easy money and stimulative measures currently in place will help the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and high unemployment have us a little worried for the longer term.

There is no change in our current investment strategy this week. In equities, we are focusing on higher-quality and multi-national stocks. We are still bullish (optimistic) on commodities and believe that government policies will weaken the dollar in the long term. TIPs continue to be a favorite, as we expect inflation to increase in the future. Consequently, U.S. treasuries are sector we are very bearish (pessimistic) on. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.

Commentary for the week ending 3-5-10

A good employment report contributed to a solid week for the markets as they move into positive territory for the year. At the close on Friday, the Dow gained 2.33%, the S&P 500 rose 3.10%, and the Nasdaq topped them both with a 3.94% return for the week.

Source: MSN Moneycentral

The top story of the week came on Friday with the unemployment report. Early in the week, we had been prepped for a disappointing number by Larry Summers, citing the snowstorms would likely send unemployment higher. Job losses as high as 200,000 were being whispered on the trading floors. Friday we found out the unemployment fell by only 36,000, the unemployment rate remained steady at 9.7%, and January and December job losses were revised slightly downward. Obviously the figures were much less than anticipated and the markets welcomed the news.

While we welcome the better-than-expected news, we still remain worried. We won’t go into the metrics used to determine that 9.7% unemployment rate, nor its deficiencies, but the real unemployment number stands around 17%. Not to mention, we are still losing jobs. It has been a year this week since the market hit its bottom - we should be adding jobs at this point, not just losing them at a lower rate. This is one of the reasons we remain cautious.

A report that has not received much attention caught our eye late Friday. The CBO has found that the debt created by the Obama budget would be $1.2 trillion higher than forecasted. By 2020, the U.S. government debt would stand at $20.3 trillion - an astoundingly high number. The reason we bring this up is because there is no doubt government officials will call for higher taxes. The Bush tax cuts are expiring this year and the higher tax rates will certainly hurt the stock market - we would love to see these lower tax rates extended. We always love to bring up the fact the government officials have it backwards when it comes to taxes. A lower tax rate increases revenues to the government. That’s right - the lower the tax rate, the more money the government makes. More frequently now, we are hearing that the Bush tax cuts have caused an increase in the deficit, but this is absolutely not true. From 2004 to 2008, tax revenues increased by the largest margin in U.S. history, with the government collecting the most money ever in 2008. The “evil” rich paid an even bigger percentage of this revenue, as well. Along with these record revenues, though, we had a significant increase in spending - the culprit behind the deficits. We will get off our soapbox now, but this is important and it will affect the value of your investments.

It looks like a fairly quiet week ahead, as there are not many corporate or economic releases scheduled. Late in the week we will get the trade balance, retail sales, and the Michigan consumer sentiment numbers. The large snowstorms earlier this month may affect these numbers to a small degree, but little change is expected. Of course, we will keep our eyes open for any surprises here.

Where are we investing now?

We are encouraged by the improving economy, but remain cautious. In the short term, however, we remain optimistic. We believe the easy money and stimulative measures currently in place will help the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and high unemployment have us a little worried for the longer term.

There is no change in our current investment strategy this week. In equities, we are focusing on higher-quality and multi-national stocks. We are still bullish (optimistic) on commodities and believe the dollar will head lower despite its recent gains. The situation in Greece could certainly happen here and we are already seeing signs of this in places like California and Pennsylvania. These issues will send the dollar lower. TIPs continue to be a favorite, as we expect inflation to increase in the future. Consequently, U.S. treasuries are sector we are very bearish (pessimistic) on. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.